Download Study Guide Sample Chapter 3

CHAPTER
SUPPLY
3
AND
DEMAND
SUMMARIZE THE CHAPTER
Construct your own chapter summary by filling in the blanks. If you have difficulty, review the
highlighted points in the chapter, then try again.
 A market is a group of ________________ and ________________ with the potential to trade
with each other.
 In economics, markets can be defined broadly or narrowly, depending on ________________.
 For the most part, in markets for consumer goods, we’ll view business firms as the only
________________, and households as the only ________________.
 In ________________ ________________ markets, individual buyers or sellers can influence the
price of the product.
 In ________________ ________________ markets (or just ________________ markets), each
buyer and seller takes the market price as a given.
 The supply and demand model is designed to explain how prices are determined in
________________ ________________ markets.
 A household’s ________________ ________________ of a good is the specific amount the
household would choose to buy over some time period, given (1) a particular price that must be
paid for the good; (2) all other ________________ on the household.
 Market ________________ ________________ (often just ________________
________________) is the specific amount of a good that all buyers in the market would choose
to buy over some time period, given (1) a particular price they must pay for the good; (2) all other
________________ on households.
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Active Learning Guide for Economics: Principles and Applications, 3e
 The law of demand states that when the price of a good rises and everything else remains the
same, the quantity of the good demanded will ________________.
 The market demand curve (or just demand curve) shows the relationship between the
________________ of a good and the quantity demanded, holding constant all other variables
that influence demand. Each point on the curve shows the total quantity that buyers would choose
to buy at a specific ________________.
 The law of demand tells us that demand curves virtually always slope ________________.
 A change in the price of a good causes a ________________ ________________ the demand
curve.
 A change in any variable that affects demand—except for the good’s price— causes the demand
curve to ________________.
 A rise in either income or wealth will increase the demand for a (an) ________________ good,
and decrease the demand for a (an) ________________ good.
 A rise in the price of a substitute will ________________ the demand for a good, shifting the
demand curve to the ________________.
 A rise in the price of a complement will ________________ the demand for a good, shifting the
demand curve to the ________________.
 In many markets, an expectation that price will ________________ in the future shifts the current
demand curve rightward, while an expectation that price will ________________ shifts the
current demand curve leftward.
 A firm’s ________________ ________________ of a good is the specific amount its managers
would choose to sell over some time period, given (1) a particular price for the good; (2) all other
________________ on the firm.
 Market ________________ ________________ (often just ________________
________________) is the specific amount of a good that all sellers in the market would choose
to sell over some time period, given (1) a particular price for the good; (2) all other
________________ on firms.
 The law of supply states that when the price of a good rises, and everything else remains the
same, the quantity of the good supplied will ________________.
Chapter 3
Supply and Demand
23
 The market supply curve (or just supply curve) shows the relationship between the
________________ of a good and the quantity supplied, holding constant the values of all other
variables that affect supply. Each point on the curve shows the quantity that sellers would choose
to sell at a specific ________________.
 The law of supply tells us that supply curves slope ________________.
 A change in the price of a good causes a ________________ ________________ the supply
curve.
 A change in any variable that affects supply—except for the good’s price—causes the supply
curve to ________________.
 A fall in the price of an input causes a (an) ________________ in supply, shifting the supply
curve to the ________________. A rise in the price of an input causes a (an) ________________
in supply, shifting the supply curve to the ________________.
 When the price of an alternate good ________________, the supply curve for the good in
question shifts leftward. When the price of an alternate ________________, the supply curve for
the good in question shifts rightward.
 Cost-saving technological advances ________________ the supply of a good, shifting the supply
curve to the ________________.
 An increase in the number of sellers—with no other change—shifts the supply curve
________________, while a decrease in the number of sellers shifts it ________________.
 In many markets, an expectation of a future price hike shifts the current supply curve
________________. Similarly, an expectation of a future price drop shifts the current supply
curve ________________.
 Favorable weather increases crop yields, and causes a ________________ shift of the supply
curve for that crop. Unfavorable weather destroys crops and shrinks yields, and shifts the supply
curve ________________.
 The ________________ price and ________________ quantity are values for price and quantity
in the market that, once achieved, will remain constant—unless and until the supply curve or the
demand curve ________________.
 To find the ________________ price and quantity in a competitive market, draw the supply and
demand curves. The ________________ price and ________________ quantity can then be
found on the vertical and horizontal axes, respectively, at the point where the supply and demand
curves cross.
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Active Learning Guide for Economics: Principles and Applications, 3e
 A rightward shift in the ________________ curve causes a rightward movement along the supply
curve. Equilibrium price and equilibrium quantity both ________________.
 Any change that shifts the supply curve leftward in a market will ________________ the
equilibrium price and ________________ the equilibrium quantity in that market.
 When just one curve shifts, and we know the direction of the shift, we can determine the direction
that both equilibrium price and quantity will move. When both curves shift, and we know the
directions of the shifts, we can determine the direction for either ________________ or
________________ —but not both. The direction of the other will depend on which curve shifts
by more.
The next three statements concern the three-step process that economists use again and again to answer
questions about the economy.
 Step # 1 is to “________________ the Market”—to decide which market or markets best suit the
problem being analyzed, and identify the decision makers (buyers and sellers) who interact there.
 Step # 2 is to “Find the ________________”—to describe the conditions necessary for
________________ in the market, and a method for determining that ________________.
 Step # 3 is to determine “What Happens When ________________ ________________”—to
explore how events or government policies change the market ________________.
LEARN THE LINGO
Fill in each blank with the appropriate word or phrase from the list provided in the word bank. (For a
challenge, fill in as many blanks as you can without using the word bank.)
__________________________ 1.
The process of combining distinct things into a single whole.
__________________________ 2.
A market in which a single buyer or seller has the power to
influence the price of the product.
__________________________ 3.
A market in which no buyer or seller has the power to
influence the price of the product.
__________________________ 4.
The specific amount some household would choose to buy
over some time period, given (1) a particular price, (2) all
other constraints on the household.
__________________________ 5.
The specific amount of a good that all buyers in the market
would choose to buy over some time period, given (1) a
particular price, (2) all other constraints they face.
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Supply and Demand
__________________________ 6.
“As the price of a good increases, the quantity demanded
decreases.”
__________________________ 7.
A list showing the quantities of a good that consumers would
choose to purchase at different prices, with all other variables
held constant.
__________________________ 8.
A curve showing the quantity of a good or service demanded
at various prices, with all other variables held constant.
__________________________ 9.
The amount that a person or firm earns over a particular
period.
__________________________10. A good that people demand more of as their incomes rise.
__________________________11. A movement along a demand curve in response to a change
in price.
__________________________12. A shift of a demand curve in response to a change in some
variable other than price.
__________________________13. A good that people demand less of as their incomes rise.
__________________________14. The total value of everything a person or firm owns at a point
in time, minus the total value of everything owed.
__________________________15. A good that can be used in place of some other good and that
fulfills more or less the same purpose.
__________________________16. A good that is used together with some other good.
__________________________17. The specific amount a firm would choose to sell over some
time period; given (1) a particular price for the good, (2) all
other constraints on the firm.
__________________________18. The specific amount of a good that all sellers in the market
would choose to sell over some time period, given (1) a
particular price for the good; (2) all other constraints on the
firm.
__________________________19. “As the price of a good increases, the quantity supplied
increases.”
__________________________20. A list showing the quantities of a good or service that firms
would choose to produce and sell at different prices, with all
other variables held constant.
__________________________21. A curve showing the quantity of a good or service supplied at
various prices, with all other variables held constant.
__________________________22. A movement along a supply curve in response to a change in
price.
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Active Learning Guide for Economics: Principles and Applications, 3e
__________________________23. A shift of a supply curve in response to some variable other
than price.
__________________________24. Another good that a firm could produce using some of the
same types of inputs as the good in question.
__________________________25. The market price that, once achieved, remains constant until
either the demand curve or supply curve shifts.
__________________________26. The market quantity bought and sold per period that, once
achieved, remains constant until either the demand curve or
the supply curve shifts.
__________________________27. At a given price, the amount by which quantity demanded
exceeds quantity supplied.
__________________________28. At a given price, the amount by which quantity supplied
exceeds quantity demanded.
Word Bank
aggregation
alternate good
change in demand
change in quantity demanded
change in quantity supplied
change in supply
complement
(market) demand curve
demand schedule
equilibrium price
equilibrium quantity
excess demand
excess supply
firm’s quantity supplied
household’s quantity demanded
imperfectly competitive market
income
inferior good
law of demand
law of supply
normal good
perfectly competitive market
market quantity demanded
market quantity supplied
substitute
(market) supply curve
supply schedule
wealth
BUILD YOUR SKILLS
For each of the following items, write the correct answer in the blank or circle the correct answer.
For each of the following items, follow the instructions, write the correct answer in the blank, or
circle the correct answer.
1. In the following demand schedule, P is the market price and QD is the quantity of limousine
rides demanded per week by buyers in Patterson, New Jersey.
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Supply and Demand
DEMAND
QD
P
$100
0
80
4
60
8
40
12
20
16
0
20
Price
($ per ride)
130
120
110
100
90
80
70
60
50
40
30
20
10
2
4
6
8
10
12
14
16
18
20
22
Quantity
a. Plot the market demand curve for limousine rides. Label this curve D.
b. From this demand curve, we can see that when the market price is $50, the quantity of
limousine rides demanded will be ____________________. If the market price rises to
$90, however, the quantity demanded will (rise/fall) to ____________________ units per
week. However, if the market price falls as low as $10, the quantity demanded will
(rise/fall) to ____________________ units per week.
2. In the following supply schedule, P is the market price of limousine rides and QS is the
quantity of rides supplied per week by sellers in Patterson, New Jersey.
Price
($ per ride)
SUPPLY
P
QS
$ 20
0
40
4
60
8
80
12
100
16
120
20
130
120
110
100
90
80
70
60
50
40
30
20
10
2
4
6
8
10
12
14
16
18
20
22
Quantity
a. Plot the market supply curve for limousine rides in the space provided. Label this
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Active Learning Guide for Economics: Principles and Applications, 3e
curve S.
b. From this supply curve, we can see that when the market price is $50, the quantity of
rides supplied will be ____________________. If the market price rises to $90, however,
the quantity supplied will (rise/fall) to ____________________ units per week. However,
if the market price falls as low as $30, the quantity supplied will (rise/fall) to
____________________ units per week.
3. In the space below, re-plot the demand curve and the supply curve for limousine rides using
the data from the previous two questions.
Price
($ per ride)
130
120
110
100
90
80
70
60
50
40
30
20
10
2
4
6
8
10
12
14
16
18
20
22
Quantity
a. By examining demand and supply together, we can see that the equilibrium price in the
market for limousine rides will be ____________________. The number of rides bought
and sold per week will be ____________________.
b. At a price of $80 per week, there would be an excess (demand/supply) of
____________________ units per week in this market. Market price would tend to
(rise/fall) as (buyers/sellers) compete with one another to (buy/sell) more limousine rides.
c. At a price of $40 per week, there would be an excess (demand/supply) of
____________________ units per week. Market price would tend to (rise/fall) as
(buyers/sellers) compete with one another to (buy/sell) more limousine rides.
Chapter 3
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Supply and Demand
4. Under current conditions, the monthly demand curve and monthly supply curve for 13-inch
color TVs in Golden, Colorado, are plotted below.
Price
($ per TV)
260
240
220
200
180
160
140
120
100
80
60
40
20
S
D
1
2
3
4
5
6
7
8
9
10
11
Quantity
a. What is the equilibrium price of TVs? ____________________.
b. Suppose the price of recliner chairs, a complement to TVs, falls. This will tend to
(increase/decrease) the quantity of TVs demanded every month, and so shift market
demand for TVs (rightward/leftward).
The table below shows data on market demand for TVs after the price of recliners has
fallen.
P
QD
$200
2
160
4
120
6
80
8
40
10
c. Plot the new demand curve for TVs on the graph above.
d. What is the new equilibrium price for TVs? ____________________.
e. Suppose the price of copper wire, an important component in the production of TVs,
rises. This will tend to (increase/decrease) the quantity of TVs supplied every month, and
so shift market supply of TVs (leftward/rightward).
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Active Learning Guide for Economics: Principles and Applications, 3e
Data on market supply of TVs after the price of copper wire has fallen are recorded in the
table below.
f.
P
QS
$120
2
160
4
200
6
240
8
280
10
Plot the new supply curve for TVs on the graph on the previous page.
g. What is the new equilibrium price for TVs after this latest change?
____________________.
5. Monthly data from Tuscaloosa on market demand and market supply of leather handbags
have been graphed below.
Price
($ per handbag)
650
600
550
500
450
400
350
300
250
200
150
100
50
S
D
10
20
30
40
50
60
70
80
90
100
110
Quantity
Chapter 3
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Supply and Demand
a. Complete the combined demand and supply schedules for leather handbags.
P
QD
QS
$450
______
______
400
______
______
350
______
______
300
______
______
250
______
______
200
______
______
150
______
______
b. If the market price were $400, quantity (demanded/supplied) would exceed quantity
(demanded/supplied) and there would be an (excess demand/excess supply) equal to
____________________ units per period. This would cause the market price to (rise/fall)
toward its equilibrium level of ____________________.
c. If the market price were $150, quantity (demanded/supplied) would exceed quantity
(demanded/supplied) and there would be (excess demand/excess supply) equal to
____________________ units per period. This would cause the market price to (rise/fall)
toward its equilibrium level of ____________________.
6. So far, we have studied market demand and market supply either as tables or as graphs.
Sometimes, however, it is more convenient to express those same relationships in the form of
equations. For example, suppose we know that, every week, the quantity of deep sea fishing
trips buyers will demand (QD) is related to market price according to the equation
QD = 20 – P/15,
while the quantity of fishing trips supplied (QS) is related to market price according to the
equation
QS = P/12 – 2.5.
Using these equations, complete the combined demand and supply schedules below. (To fill
out the table, just plug market price into the demand or supply equation given above and
solve for the corresponding quantity demanded or supplied.)
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Active Learning Guide for Economics: Principles and Applications, 3e
P
QD
QS
270 _____ _____
Price
($ per trip)
330
210 _____ _____
300
90 _____ _____
270
30 _____ _____
240
210
180
150
120
90
60
30
2
4
6
8
10
12
14
16
18
20
22
Quantity
Now look at the table you just completed. Notice that at very low market prices, quantity
demanded exceeds quantity supplied, while at higher prices quantity supplied exceeds
quantity demanded. Just by looking at the data in these demand and supply schedules, we are
therefore unable to determine the equilibrium price in this market.
But we can find the equilibrium with our equations. Suppose we let Pe stand for the unknown
value of the equilibrium price in this market. While we do not know Pe, we know it is special:
it is the only price at which quantity demanded will equal quantity supplied. To find Pe, we
therefore simply set the equation for quantity demanded equal to the equation for quantity
supplied. Setting QD = QS in this way, we obtain
20 – Pe/15 = Pe/12 – 2.5.
To solve for Pe, we add 2.5 to each side, then add Pe/15 to each side, and get
22.5 = Pe/12 + Pe/15.
Next, putting the two terms on the righthand side over the common denominator
12 × 15 = 180, we obtain
22.5 = 27Pe/180.
Finally, by multiplying both sides by 180 and dividing by 27, we get the final answer
Pe = (22.5)(180)/27 = 150.
7. Using the data you generated in the preceding exercise, plot the market demand and supply
curves in the space provided there. Once you’ve completed your graphs, locate the
equilibrium market price. What is that price according to your graphs?
____________________ Is it the same price you obtained by solving the demand and supply
equations? ____________________ It should be, so if it is not, go back and see what you did
wrong.) What is the equilibrium quantity? ____________________ Is it the same as you
Chapter 3
33
Supply and Demand
would get if you plugged your answer for equilibrium price into the market demand and
market supply curves? ____________________ (It should be.)
8. Annual market demand and market supply for tons of California cumquats are given,
respectively, by the following equations
QD = 500 – P/8
QS = P/2 – 500.
Without plotting graphs for demand or supply, answer the following questions.
a. In equilibrium, the price of California cumquats will be $____________________. The
quantity of cumquats bought and sold will be ____________________ tons.
b. If market price were $1,200, quantity demanded would be ____________________ tons
and quantity supplied would be ____________________ tons. There would be (excess
demand/excess supply) equal to ____________________ tons of cumquats per year.
c. If market price were $2,000, quantity demanded would be ____________________ tons
and quantity supplied would be ____________________ tons. There would be (excess
demand/excess supply) equal to ____________________ tons of cumquats per year.
TEST YOURSELF
To see what you really know and remember, take this test at least a day after you’ve read the chapter in
the text and completed the exercises in this study guide.
Multiple Choice: Circle the letter in front of the single best answer.
1. In economics, a “market” is
a. a geographic location where buyers and sellers trade with each other.
b. virtually always defined locally, rather than nationally or internationally.
c. virtually always defined nationally, rather than locally or internationally.
d. defined only after an exchange actually takes place.
e. a group of buyers and sellers with the potential to trade.
2. A perfectly competitive market is one in which
a. buyers and sellers never actually meet each other.
b. no buyer or seller can influence the price of the product being traded.
c. a few very large firms directly compete with each other for customers.
d. there are no limits to the tricks sellers can play to drive their rivals out of business.
e. all of the above.
3. Which of the following would cause a rightward shift of the demand curve in the market for
fresh eggs in St. Louis?
a. A technological advance in the egg-producing industry
b. An increase in the number of firms in the egg-producing industry
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Active Learning Guide for Economics: Principles and Applications, 3e
c. An increase in the price of chicken feed
d. An increase in the price of powdered eggs, a substitute for fresh eggs
e. None of the above
4. If used books are an inferior good, then a decrease in income will cause a
a. rightward shift of the demand curve for used books.
b. leftward shift of the demand curve for used books.
c. rightward shift of the supply curve for used books.
d. leftward shift of the demand curve for used books.
e. shift in both the demand and the supply curves for used books.
5. If the price of oranges is expected to rise, then
a. the demand curve for oranges will shift rightward.
b. the demand curve for oranges will shift leftward.
c. the supply curve for oranges will shift leftward.
d. both a and c.
e. both b and c.
6. Which of the following would shift the supply curve for a good leftward?
a. A rise in the price of a complement
b. A rise in the price of an input used in producing the good
c. A cost-saving technological advance in producing the good
d. All of the above
e. None of the above
7. If there is an excess supply of a good, we can generally expect
a. the price of the good to rise.
b. the price of the good to fall.
c. the demand curve to shift rightward.
d. the supply curve to shift leftward.
e. both c and d.
8. A rise in the price of a substitute for a good will cause
a. the equilibrium price of the good to increase and the equilibrium quantity to decrease.
b. the equilibrium price of the good to decrease and the equilibrium quantity to increase.
c. both the equilibrium price and the equilibrium quantity of the good to increase.
d. both the equilibrium price and the equilibrium quantity of the good to decrease.
e. no change in either the equilibrium price or equilibrium quantity of the good.
9. Which of the following is one of the three steps in the three-step process that economists use
to solve problems?
a. Graph the Equations.
b. Find the Equilibrium.
c. Solve for the numbers.
Chapter 3
Supply and Demand
35
d. Find the Calculator.
e. Drink the coffee.
10. In the market for potatoes, a rise in the price of beef (a complement) and a rise in the wage
paid to farm labor (an input) would cause
a. both the equilibrium price and equilibrium quantity to rise.
b. both the equilibrium price and equilibrium quantity to fall.
c. a decrease in the equilibrium quantity, and an ambiguous effect on the equilibrium price.
d. an increase in the equilibrium price, and an ambiguous effect on the equilibrium quantity.
e. none of the above.
True/False: For each of the following statements, circle T if the statement is true or F if the statement is
false.
T
F
1. The law of demand tells us that, for most goods, a rise in income will cause an
increase in quantity demanded.
T
F
2. If people want to buy more of a good at any price, sellers will want to sell more of
the good, so the supply curve will shift.
T
F
3. A change in the expected future price of a good will generally cause both the supply
curve and the demand curve for the good to shift.
T
F
4. A “change in supply” refers to a movement along the supply curve.
T
F
5. A rightward shift in the demand curve for cotton shirts will cause a rise in both the
equilibrium price and equilibrium quantity of cotton shirts.
T
F
6. A rise in the price of rayon shirts will cause a decrease in the equilibrium price and
quantity of cotton shirts.
T
F
7. The first step of the three-step process is: Find the Equilibrium.
T
F
8. The last step of the three-step process is to ask: What Happens When Things
Change?
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Active Learning Guide for Economics: Principles and Applications, 3e
Short Answer: Fill in the blanks with brief answers.
1. List four distinct variables (and the direction of change for each) that would cause the demand
curve for a good to shift leftward. (Assume that the good is normal.)
__________________________________ __________________________________
__________________________________ __________________________________
2. List four distinct variables (and the direction of change for each) that would cause the supply
curve for a good to shift leftward.
__________________________________ __________________________________
__________________________________ __________________________________